Evaluating Drought Forced Culling Decisions
Larry Falconer and David Anderson
Texas AgriLife Extension Service
May 10, 2011
The extremely dry conditions that we are experiencing in most of Texas are forcing
producers to make very tough choices about what to do with their breeding cattle. This is the
latest in a string of these types of problems, much like what we saw in the spring and summer of
1996, again in 1998 as well as 2006 and 2008. However, market conditions and expectations of
future prices were much different than today. In the spring of 1996 we were faced with the
lowest cattle prices since the mid-1970's, along with a grain and forage prices that were
historically very high, and set to move higher. Today, cull cow and calf prices are much stronger
even though we face higher grain and forage prices.
What is the same now, as in 1996, are the economic and financial analysis tools and how
they should be used to make a sound disinvestment or investment decision for breeding cattle.
Decisions such as:
 keeping or selling a cow,
 keeping a heifer for replacement,
 selling the potential replacement heifer,
 how much feed you can afford to buy to keep that cow or heifer in the herd
hinge on the expected value of that type of animal in your herd when compared with what the
market is offering you for that type of animal. These decisions can be analyzed with this simple
tool.
How do you decide what a cow is worth in your herd? The answer is not always as
simple as what you have to pay for the same age and quality cow over the scale at your local
auction barn. In fact, a cow is just like a machine in a factory, and as such she has both a
productive value and a salvage value. She is really worth the sum of all the cash she can earn
over her lifetime less all the expenses she creates, which includes her salvage value as a cull
cow. As you would expect, the net cash flows the cow can generate over her life time depends
on the future prices of calves, the ranch’s cost structure and the eventual salvage value of the
cow. Not only does the size of the cash flows impact the value of the cow, the timing of when
the cow generates income and expenses is important in determining the cow’s value because
money has earning power of its own.
The primary economic analysis tool to determine the value of the animal in your herd is
the capital budget. The capital budget takes the net cash flow calculated in the enterprise budget,
which includes revenue and cost information expected to be generated over the time the animal
is in the herd, and calculates the economic feasibility of the investment. There are several types
of capital budgeting tools, and the one we are using in this example to calculate the maximum
feasible economic bid price for a cow is called the net present value.
Table 1 shows an example of how this investment model may be used to calculate an
expected price for a cow and calf pair based on projected prices and input costs. This example
would represent the expected market price for a cow-calf pair under a "best case" scenario. In
this example, it is assumed that steers will be weaned at 500 pounds, and heifers at 475 pounds,
and it is expected that this cow will remain in the herd through the year 2017, weaning a calf
every year for the next six years. Steer, heifer and cull cow prices are assumed to decline from
current levels and expected to bottom in the year 2017. The costs associated with maintaining
this cow is assumed to be $550 per year. For the first year, these expenses are prorated out at a
total of $400. Expected cash flows are discounted at 5% to account for the time value of money
and uncertainty.
Given these assumptions, a bid price of $1195 per pair equates to a net present value near
zero. This bid value leads to an internal rate of return of 5% in the payback period of seven
years. These results indicate that a bid of $1195 per pair would be the maximum feasible bid
price given the assumptions outlined in the previous paragraph. At any price above the $1195
bid price, the producer would be better off selling the pair. Also, if the maintenance cost in the
initial year increases due to drought the producer would be better off selling the cow calf pair at
any level above $1195.
As of the week ending May 7, 2011 prices for cow-calf pairs of young to middle-aged
cows with 100 to 300 pound calves selling in South Texas were ranging from $900 to near $1100
per pair. The high end of this range is slightly below the maximum feasible bid price calculated
in this example. When compared with the calculated maximum feasible bid price of $1195 per
pair in our example, in "normal times" the producer would be better off keeping the pair.
However, since we are in drought conditions it is very likely that the prorated operating cost for
2011 is too low. In our example, we only have $95 per pair in current value to cover any
supplemental costs due to the drought. If the producer believes that would not be sufficient to
cover extra expenses due to the drought, it would be better to sell the pair now. Also, if the cow
missed weaning a calf in any of the future periods, the model would generate a sell signal.
This is one example of how a producer who is faced with decisions related to culling
cattle in response to drought can utilize decision support aids to evaluate these difficult
management alternatives. It is important that the data specific to your operation be used to make
sound decisions with these decision support aids. It is also important, that producers use these
decision support aids to carryout sensitivity analysis by changing production, cost and output
price assumptions to see what affect those changes have on the decision variables.
As you can see, the expected value of different types of cows in your herd depends on a
lot of factors that are uncertain. Because of this uncertainty, many people totally ignore planning
and consider the time spent on planning efforts to be wasted. Granted, it is highly unlikely that
the future will unfold exactly as planned. However, it should be pointed out that cattle market
conditions have never been stable over any extended period of time, so expecting that current
conditions will prevail for the future is unreasonable. It should also be pointed out that the result
of the planning process does not have to be an exact prediction to have value.
There are no hard and fast rules of thumb that will consistently provide the best culling
strategy. Given the age composition of different herds along with the different physical
resources for a particular ranch, the “cull half” and “cull to pay feed” may not be nearly
aggressive enough for a younger herd or may be far too aggressive for an older herd. However,
the use of these tools that we have discussed can provide benchmarks to calculate what might be
best to do with the hand that you as a cattle producer have been dealt. This analysis should be
carried out for your particular situation, because the “right” answer depends on the cost structure
for your ranch and what you expect future prices to be.
Another case to examine with this tool might be whether to sell young bred cows today
versus feeding through the drought (Table 2). Young bred cows weighing 1100-1200 pounds
averaged $1,050 per head in April at Oklahoma City. Using this price for the cow price
generated a Net Present Value (NPV) of $243.91. This NPV means that you have $243.91 of
“value” to “play with.” You can afford to feed that much money’s worth to try to get through the
drought. At $1.50 per day, you can afford to feed for about 163 days before it is better to sell the
cow now. That also assumes that you get a calf each year for the next 6 years out of that cow
Most culling and buying back decisions can be examined with this simple tool. Any
numbers highlighted in yellow (yellow on the computer, gray in this report) can be changed to
evaluate new alternatives. These tools are available through your local County Extension office,
or at http://agfacts.tamu.edu/~lfalcone/newweb/droughtmgmt.htm
For more information contact:
Larry Falconer (361) 265-9203 l-falconer@tamu.edu
David Anderson (979)845-4351 danderson@tamu.edu
Table 1. Cow Bid Price Estimate Calculator Example.
Steer Weight
500
Cull Cow Sale Weight (Pounds/Head)
1,000
Heifer Weight
475
Number of Calving Opportunities (Years)
7
$1,195
Discount Rate (%)
5.00
Pair Price
Lb.
Net
Present
Value
(NPV)
%
($0.09)
Year
2011
Year 1
Calf Crop or Weaning %
2012
2013
2014
2015
2016
2017
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
100
100
100
100
100
100
100
Steers Price ($/Cwt)
$140
$150
$155
$133
$130
$126
$126
Heifer Price ($/Cwt)
$134
$144
$149
$127
$124
$120
$120
$0
$0
$0
$0
$0
$0
$60
Gross Receipts (Calf
Sales)
$668
$717
$741
$634
$620
$600
$600
Cow Operating Cost/Year
$400
$550
$550
$550
$550
$550
$550
Net Above Operating Cost
$268
$167
$191
$84
$70
$50
$50
$0
Net Cash Flow
$268
$167
$191
$84
$70
$50
$50
$0
Cow Salvage Value
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$600.00
$0.00
Cull Cow Price ($/Cwt)
$0
Financing Information
Pre-Tax Cash Flows
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
($1,195.00)
$268.00
$167.00
$191.00
$84.00
$70.00
$50.00
$650.00
*Comments regarding this investment scenario. The analysis of this scenario is on a pre-tax
basis.
The negative net present value indicates that the price of $1195 per head is too high.
This investment has an internal rate of return of 5.0%.
This investment has a payback period of 7 years.
The positive cash flows across the planning horizon indicate that this investment is financially feasible.
$0.00
Table 2. Evaluating Selling Young Bred Cow Versus Feeding Through Drought.
Steer Weight
500
Cull Cow Sale Weight (Pounds/Head)
1,000
Heifer Weight
475
Number of Calving Opportunities (Years)
7
$1,050
Discount Rate (%)
5.00
Pair Price
Lb.
Net
Present
Value
(NPV)
%
243.91
Year
2011
Year 1
Calf Crop or Weaning %
2012
2013
2014
2015
2016
2017
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
100
100
100
100
100
100
100
Steers Price ($/Cwt)
$140
$150
$155
$155
$133
$126
$126
Heifer Price ($/Cwt)
$134
$144
$149
$149
$127
$120
$120
$0
$0
$0
$0
$0
$0
$60
Gross Receipts (Calf
Sales)
$668
$717
$741
$634
$620
$600
$600
Cow Operating Cost/Year
$400
$550
$550
$550
$550
$550
$550
Net Above Operating Cost
$268
$167
$191
$84
$70
$50
$50
$0
Net Cash Flow
$268
$167
$191
$84
$70
$50
$50
$0
Cow Salvage Value
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$600.00
$0.00
Cull Cow Price ($/Cwt)
$0
Financing Information
Pre-Tax Cash Flows
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
($1,195.00)
$268.00
$167.00
$191.00
$84.00
$70.00
$50.00
$650.00
*Comments regarding this investment scenario. The analysis of this scenario is on a pre-tax
basis.
The negative net present value indicates that the price of $1195 per head is too high.
This investment has an internal rate of return of 5.0%.
This investment has a payback period of 7 years.
The positive cash flows across the planning horizon indicate that this investment is financially feasible.
$0.00